Negative gearing not biggest culprit in rising house prices

No tax break has drawn quite the opprobrium of negative gearing, fingered as an egregious rort favouring the wealthy that punches a massive hole in federal finances, and drives up house prices to boot.

Former treasurer Paul Keating tried to end negative gearing, but was rebuffed by his cabinet colleagues. Photo: Rob Homer

The assessment is not entirely without basis, but there are other concessions to home owners that cost the budget far more, and negative gearing sits well down on the list of factors affecting housing affordability.

Negative gearing allows investors to claim losses, including interest payments, associated with investments against other income. It applies to all investments, not just housing, and has been in the tax code since the 1930s.

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The release by the National Archives of the Cabinet papers for 1986 and 1987 revealed that former treasurer Paul Keating argued for abolishing negative gearing.

In 1985, Labor tightened negative gearing rules, and Keating wanted to take the next step and scrap it altogether. Keating got rolled, spectacularly. In 1987, Labor reversed the tightening and the generous provisions applying to negative gearing pre-1985 were restored.

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It was an illustration of how there are few policy areas more politically sensitive than housing.

There is no question that Australia's tax system heavily favours home owners.

According to an analysis by the Grattan Institute, the housing concession with the biggest cost to the federal budget is the exemption of owner-occupied homes from capital gains tax. It's hard to quantify but it reckons it costs the federal budget about $15 billion a year in foregone revenue.

That compares with a saving of about $2 billion per year (after an initial year or two of savings closer to $4 billion) from abolishing negative gearing on all investments, including housing.

Scrapping the CGT exemption on the family home is, of course, politically impossible. The home is most people's biggest investment, real estate a national obsession and home ownership the dream of most.

Negative gearing is not the bogy responsible for soaring house prices. Low interest rates and easier credit have had the most significant impact over the past two decades.

A more achievable, although still difficult, reform would be to examine the effective exemption of the family home from the pension assets test.

Some 80 per cent of seniors with assets of $1 million (including the family home) are eligible for some kind of pension, and receive an average welfare payout of $200 per week, according to Grattan's ''Balancing Budgets'' report released in November.

Almost $20 billion in pension payments are made each year to seniors with more than $500,000 in assets. The report reasons that by including at least some of the value of the family home in the assets test, many older people would downsize, selling their homes and improving the available housing stock for families.

All up, such a reform would save $7 billion a year.

And then there's the Howard government capital gains tax discount, which halves the tax paid on profits from the sale of investments for individuals and most trusts.

Like negative gearing, it applies to all investments, not just housing. Introduced in 1999, it now costs the budget about $5 billion a year.

Negative gearing is not the bogy responsible for soaring house prices. Low interest rates and easier credit have had the most significant impact over the past two decades.

Which is not to say it shouldn't be the subject of policy scrutiny. It's just there are many other tax breaks that cost the budget more, and have a bigger impact on housing affordability.